by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock
The predictions business is always fraught with uncertainty, but although it is still very early in the year, most of our predictions appear to be on track. The economic environment continues to improve, stocks (particularly US stocks) have been performing well and investor flows into equities have been accelerating.
1. US growth accelerates as US real GDP reaches a new all-time high.
There certainly are some downside risks to economic growth, but we are feeling pretty good about this prediction as of now. We continue to believe that US GDP growth will accelerate and come in at roughly 3.0% to 3.5% for all of 2011. More importantly, we believe the components of growth will be higher quality than last year (with increasing evidence of real final sales rather than inventory accumulation) as the economy exits recovery mode and heads into expansion.
2. The US economy creates 2 million to 3 million jobs in 2011 as unemployment falls to 9%.
Among all the components of the economic recovery, the labor market has remained one of the most stubbornly weak for almost two years now. Leading labor market indicators, including jobless claims, profit trends and lending standards, have been pointing in a positive direction for some time, but these trends are just now starting to translate into actual hiring. The most recent report (for March) showed an increase of more than 200,000 new jobs and the unemployment rate has already fallen below 9%. There is still a great deal of healing to do that will take some time, but we believe the trends are pointing in the right direction.
3. US stocks experience a third year of double-digit percentage returns for the first time in over a decade as corporate earnings reach a new all-time high.
Notwithstanding the mid-quarter correction, markets are off to a strong start for 2011, and are already more than halfway there in terms of reaching double-digit gains. While we expect to see continued volatility and cannot rule out additional corrective action along the way, we remain optimistic about the path of equity markets. Corporate earnings reports continue to be better
than expected and our belief is that they will hit a new all-time high in the third quarter.
4. Stocks outperform bonds and cash.
With cash likely to continue returning little more than zero, any positive returns for equities will mean they beat cash. Additionally, given our forecast for continued improvements in economic growth, we think stocks are likely to continue to outpace bonds as well.
5. The US stock market outperforms the MSCI World Index.
This prediction has certainly come true so far. The S&P 500 Index has returned 5.9% on a year-to-date basis compared to 4.8% for the MSCI World Index. When compared to other regions, the US economic recovery continues to be stronger, and corporate earnings in the United States also have been ahead of the pack. We maintain our conviction that this prediction is likely to come to pass as Europe continues to struggle with some serious debt-related issues and Japan deals with the damage and uncertainties wrought by the earthquake.
6. The US, Germany and Brazil outperform Japan, Spain and China.
Although we have certainly gotten the US and Japan components of this prediction right so far, on an equal-weighted basis, we are slightly behind on this one as of now. Germany has been held back by the region’s sovereign debt issues, although, ironically, Spain has performed well coming out of the doldrums of last year. Brazil has been struggling with the strengthening of its currency, which has hurt exports, while Chinese stocks have (so far) managed to overcome inflation issues. Time will tell as to how this prediction shapes up at year-end.
7. Commodities and emerging market currencies outperform the dollar, euro and yen.
In most cases, commodities are off to a strong start for the year. Oil prices are clearly higher and gold prices ended the quarter at a new record price of $1,439 per ounce. Other commodities, including industrial metals, were mixed for the quarter. From a currency perspective, the value of the US dollar has been pushed lower in recent months and, notwithstanding the post-earthquake spike, the value of the yen also has been falling. While the euro has been showing some strength, emerging markets currencies in general have been outperforming.
8. Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, mergers and acquisitions (M&A) and business reinvestment.
So far, signs have been pointing to this prediction coming through as we expected. Corporate cash levels remain high and balance sheets are strong, which have allowed companies the ability to engage in healthy levels of all of these shareholder-friendly activities.
9. Investor flows move from bond funds to equity funds.
Although flows into equities paused somewhat when volatility became elevated during the brief market correction, the overall migration of fund flows from bonds to stocks has remained strong. This is a trend that we expect will continue through the course of 2011.
10. The 2012 presidential campaign sees a plethora of Republican candidates while President Obama continues to move to
the center.
In our opinion, President Obama indeed has been moving toward the center, as evidenced by the extension of the Bush-era tax cuts as well as other concessions he has been willing to make. As of now, it has been surprisingly quiet in terms of announced GOP presidential candidates, but we expect this will change in the months to come.
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